01 REVIEW OF OPERATIONS AND ACTIVITIES

A GLOBAL DIVERSIFIED ENERGY COMPANY

Linc Energy is a diversified energy company expanding into new global locations to realise economic energy solutions from stranded resources. The past twelve months has seen the company expand into traditional oil production in the United States with the view to applying Enhanced Oil Recovery (EOR) techniques to near-depleted oil wells for increased oil production rates. Having proven its Underground Coal Gasification (UCG) and Gas to Liquids (GTL) technologies for the production of cleaner power and fuels, the company’s business model is based on: Oil and Gas and EOR; Coal and Clean Coal; and Clean Energy and Clean Fuels.

The company operates across four continents with projects and offices in Australia, North America, the United Kingdom/Europe and Asia (Vietnam and Uzbekistan).

HEALTH, SAFETY AND ENVIRONMENT

Maintaining its impressive safety record during the past financial year, Linc Energy has focused on consistently managing safety across its global jurisdictions. This has involved the development of safety systems and plans in Australia and the United States to ensure the company provides the best tools and structures possible across its corporate offices and operational sites. As such, a new set of Health and Safety Management System Standards is being developed, including the establishment of two Health and Safety Management committees. The corporate committee, made up of company executives and senior management, sets the safety direction for the company. The field committee, made up of safety advisors and site managers, acts to advise on the practical elements of implementing the corporate standards. In the interest of promoting safety and encouraging an employment culture

committed to working safely at all times for future success, the team established and implemented the ‘SafetyLinc – Our Future, Your Future’ brand.

At the Chinchilla Demonstration Facility, the company’s contractor management system has proven to be a stringent method to ensure that health, safety and environmental risks are addressed and documented prior to any work commencing on the site. This, as well as improvements to the ‘permit to work’ system and supervisor training, has resulted in excellent safety performance at the facility. During the period no lost time or medical treatment injuries were recorded for the Chinchilla Demonstration Facility. For the geology and exploration team one lost time injury was recorded due to a minor injury to a contractor that occurred during the cleaning of camp facilities that service the drilling activities in the Arckaringa Basin. For Linc Energy’s United States operations no Occupational Safety and Health Administration (OSHA) injuries were recorded. Additionally, no contractor recorded an OSHA injury while working for Linc Energy in North America.

Linc Energy’s focus on environmental management continued throughout the past financial year as the company pursued its vision of unlocking its coal, oil and gas resources for energy solutions. During the period the team grew to accommodate more resources to manage processes relating to environmental monitoring, regulatory obligations and the Environmental Impact Statement workload as part of the sale process for the Teresa coal asset near Emerald.

In terms of the progress of commercial UCG operations in Queensland, the government appointed Independent Scientific Panel reviewing UCG will release its report in 2012. The panel’s interim report on Linc Energy released on 24 January 2011 acknowledged the company’s groundwater monitoring process, technology and demonstration facility and positive approach to dealing with panel experts. In the panel’s report they went on to describe Linc Energy’s UCG trial near Chinchilla as ‘world’s leading practice’.

Following adverse trial operating conditions from two junior UCG companies, Linc Energy was issued with an Environment Evaluation Notice by the Queensland Department of Environmental and Resource Management (DERM). Linc Energy cooperated with DERM to supply the information they required. The result of the notice indicated that DERM agreed with Linc Energy’s original findings that groundwater salinity anomalies were naturally occurring phenomena.

Linc Energy values its relationship and engagement with its stakeholders. Given the company has expanded into new jurisdictions it has now implemented its stakeholder education program to regulators in new regions such as Alaska, Wyoming and Louisiana. This program aims to increase the understanding of UCG and GTL technologies and their benefits for the production of cleaner power and fuels.

DOWNSTREAM TECHNOLOGIES PROGRAM

Linc Energy formed a dedicated Downstream Technologies group early in 2011 with responsibility for the development of all projects and business opportunities downstream of the oil and gas production and UCG portfolios for the company. The group plays a pivotal role in defining and engineering facilities to determine the most profitable use of the company’s resources.

To facilitate global UCG to GTL energy projects, Fluor Enterprises Inc. was selected early in 2011 to prepare a preliminary Front End Engineering Design (pre-FEED). This included engineering a modular design and logistics for a plant located in interior and coastal sites in the United States. The pre-FEED study is based on a nominal plant capacity of 5,000 barrels per day of transportation fuels using Fischer-Tropsch technology.

Various process schemes and technologies were considered to arrive at the selected concept. Some of the flow schemes were novel and allowed for the economic production of the most valuable products. The selected scheme will capture more than 70 per cent of the produced carbon dioxide to be used for EOR.

The pre-FEED deliverables will be used for a parallel, in-house execution strategy using low cost engineering and fabrication centres. The conclusions from these activities will allow Linc Energy to arrive at a project investment decision.

ENHANCED OIL RECOVERY PROGRAM

During the period and as part of the company’s aggressive oil asset acquisition program in the United States, Linc Energy acquired three producing oil fields covering over 27,000 acres of the Powder River Basin in Wyoming. These fields currently produce 190 barrels of oil per day and provide the company with a significant EOR opportunity.

Linc Energy holds significant coal leases in the Powder River Basin and is preparing its first UCG operation for the area. By using high value carbon dioxide from the UCG process to boost oil production rates management anticipate that EOR has the potential to increase production from a few hundred barrels per day to over 10,000 barrels per day. Total recoverable oil in the area is estimated to be 70 million barrels.

Linc Energy is now engaged in a field redevelopment program to increase short-term oil production and prepare its fields for carbon dioxide injection. This includes putting idle wells back into production, increasing the water injection capacity by adding new injectors, working the existing flow line system in the fields to support additional fluid flows, and studying the geology, production and reservoir history to find ways to optimise field production.

UNERGROUND COAL GASIFICATION PROGRAM

Linc Energy is the world leader in UCG for the production of cleaner energy solutions. With 50 years of UCG experience at the Yerostigaz commercial UCG facility in Uzbekistan and world-first enhancements at the UCG demonstration facility in Queensland the company is prepared for commercial success.

Linc Energy has a program of UCG projects planned for Australia and the United States and is also assessing opportunities in Africa, Europe and Asia. See pages 22 to 25 for details of the company’s UCG projects.

POWER OPPORTUNTIES

Throughout the past financial year Linc Energy has considered a number of technology options for converting UCG syngas to electrical energy across the full range of power outputs. Following a detailed feasibility review with Uhde Shedden and SKM for utility scale power opportunities based on gas turbine technology (notionally 50MW to 400MW), further effort was applied to reviewing technology options for smaller scale power generation. Earlier this year, Linc Energy commissioned SKM to perform a front-end study into small power options in the range of 1MW to 30MW.

At its UCG to GTL demonstration facility in Queensland, Linc Energy has plans to develop a project to install power generation capacity to prove the concept of UCG for power generation in combination with liquids production. This will also provide an economic benefit by offsetting the cost of power to the UCG and GTL processes at the site. The company is also planning the commercial application of the latest generation hydrogen fuel cell from AFC Energy to use excess valuable hydrogen from the syngas stream, which will also improve the carbon-hydrogen ratio for the GTL process. The introduction of this fuel cell technology will use this high value stream of hydrogen to produce electricity to contribute to the operation of the facility.

Linc Energy is currently considering a number of commercial power opportunities around the globe. Now with a selection of best-fit technologies for potential projects, the company has engaged equipment suppliers to establish the supply of the most technically appropriate and cost effective plant options. Linc Energy is also developing an opportunity to implement a utility scale UCG power generation project using large industrial gas turbine technology in the United States and is looking at power generation opportunities in Europe using both UCG and aboveground gasification technologies to produce syngas.

GLOBAL PROJECTS AND OPERATIONS

AUSTRALIA

Coal, Oil And Gas Exploration

QUEENSLAND

Biloela Basin

The drilling program for this region was completed in late 2010 and confirmed the presence of an elongate sedimentary basin hosting brown

coal (lignite) accumulations. Studies continue to develop an approach to this deposit.

Bowen Basin

During the period, four sites were re-drilled to provide core samples for further washability and yield testing. Most notably, the Environmental Impact Statement (EIS) for the Teresa coal asset was made, along with a corresponding mining lease application (MLA 70442) to supplement Linc Energy’s existing MLA. Work continues to finalise the Initial Advice Statement and federal Environment Protection and Biodiversity Conservation application for the EIS process.

To date the team has expended a great deal of effort into the Teresa asset sale process, in particular with a focus on drilling for resource infill and technical data to support a Teresa underground mine study and evaluation.

Galilee Basin

Linc Energy continues to consider the highest return to shareholders from the Pentland coal asset. The asset has sought-after qualities and properties and the company continues to provide technical and commercial details to interested parties.

Ipswich Basin

Linc Energy retains one Exploration Permit for Coal (EPC) in the Ipswich Basin. During the period, three locations were identified for drilling. Access to the area continues to be negotiated with overlying petroleum tenement holders through the Industry Consultative Committee.

Millungera Basin (Northern Galilee Basin)

Linc Energy holds five EPCs as part of its ‘Great Northern Leases’ region in the district of Julia Creek/Cloncurry. The application for another five tenements has also been accepted by the regulator.

During the period, access to the tenements was delayed due to Cyclone Yasi and flooding over the summer months. The team has undertaken an initial round of drilling and is preparing to return to site in the near future to continue the exploration program. The company expects to receive results early in 2012.

Surat Basin

Linc Energy is well established in the Surat Basin region with 373,129 acres of coal tenements. Linc Energy’s Mineral Development Licence 309 is home to the company’s UCG and GTL Demonstration Facility. During the period the team supported the construction of the next UCG gasifier with characterisation drilling of over 50 wells and related monitoring conducted.

SOUTH AUSTRALIA

Arckaringa Basin

During the period the Arckaringa Basin has been the focus of a sustained exploration effort. Part of this effort saw the start of a 1,127 kilometre regional seismic program conducted by contractor Terrex Seismic (now completed). This was one of Australia’s largest ever seismic programs and will provide a clear direction for future exploration. Initial indications from the program appear promising. Further analysis of the results will continue for the remainder of 2011 and into 2012.

Permitting for the oil and gas exploration program began, as did the start of a coal and deep stratigraphic drilling program to test the shale oil potential of the Stuart Range Formation. Overall the team has expended

a significant amount of effort for site clearances, permitting and fit-for-purpose safety auditing to facilitate work in this exciting region.

Walloway Basin

During the period the team completed over 1000 metres of drilling in the region, including 63 metres of PQ core. Thick brown coal formations were confirmed and at this stage a project for the Walloway Basin remains under technical review.

UCG To GTL Demonstration Facility

UCG Development

During the financial year Linc Energy continued to operate Gasifier 4 at the demonstration facility located near Chinchilla in Queensland. The gasifier has been operating since February 2010, supplying synthesis gas to the GTL demonstration plant. This is the largest and longest running UCG demonstration in the world.

During the period a number of UCG trials were conducted. These included:

• The demonstration of oxygen enrichment to form the basis for the application of higher levels of enrichment for future gasifiers
• The manipulation of gas composition through the injection of water
• The manipulation of gas composition through the injection of carbon dioxide
• The use of multiple feed injection points for optimum gasifier operation
• Field trials for the coil tubing unit to demonstrate how it can be used safely and cost effectively to 'clean' UCG wells during a 'workover' procedure.

During the period Gasifier 5 was also approved and designed. This gasifier represents the next generation in Linc Energy’s world-class underground gasifier design. It contains advanced design methodologies and technologies specifically tailored to support UCG for the commercial development of Linc Energy’s EOR and GTL energy applications.

Gasifier 5 incorporates proprietary oxygen injection equipment to enable the production of higher quality synthesis gas for optimal GTL plant design. It will use state-of-the-art downhole instrumentation to measure temperature and pressure, and conduct groundwater sampling. Substantial drilling was required for Gasifier 5 for site characterisation, operational monitoring wells, and the completion of directional process wells and the team successfully planned and secured rigs for these purposes. Following the implementation of a comprehensive, more advanced site characterisation program this procedure will be used for its global UCG projects to identify and define suitable UCG resources in the future.

The Gasifier 5 project team has coordinated final designs, early procurement, and the delivery of items with long lead times. They further developed control budgets and schedules and coordinated third party and internal resources. The site teams also worked with the company’s technology and project teams to support the early planning and infrastructure preparation for Gasifier 5, which involved substantial civil works.

GTL Development

During the period the GTL plant was modified to improve process conditions for catalyst reduction and regeneration. A new syngas compressor was installed, which resulted in 95 per cent availability of the Fischer-Tropsch (FT) section. This exercise provided valuable information

on catalyst activity over an extended period whilst maintaining FT liquids production.

Following the end of the annual reporting period, the next generation of catalyst was applied to the GTL plant. According to laboratory experiments, Linc Energy expects this catalyst to have significantly higher activity than previously achieved. The goal of the next campaign will be to monitor the activity and selectivity of the new catalyst within varying feed compositions and operating conditions. Using mathematical models of the FT reactor and process configuration, the results will be used to confirm the design basis for the company’s commercial FT technology and reactor.

Process improvements at the UCG to GTL demonstration facility have enabled the completion of three separate test campaigns as well as the production of Linc Energy’s own synthetic diesel used for the ‘Diesel Dash’. Linc Energy is the world’s first producer of FT synthetic fuel from an integrated UCG to GTL facility. The synthetic fuel produced was processed and certified according to the standards specified by the Australian Federal Department of Environment, Water, Heritage and the Arts based on the Fuel Quality Standards Act 2000 and meets the stringent Euro 5 standards.

Linc Energy’s synthetic diesel achieved near-zero sulphur and aromatics content as well as a high cetane number of 70. It was tested at a certified authority in Australia where diesel engine emission tests are performed. Depending on engine speed and load, the results from the testing indicated that carbon monoxide emissions were reduced by 29 per cent, nitrogen oxide was reduced by 12 per cent, and particulate matter emissions were reduced by 73 per cent.

Linc Energy is now processing FT product to create synthetic jet A1 fuel. This will be manufactured according to the standards established by the International Air Transport Association and the relevant Australian requirements. Successful production of jet fuel will enable Linc Energy to demonstrate the performance of the product in a test exercise similar to the ‘Diesel Dash’.

Other Facility Improvements

The wastewater treatment plant at the facility was successfully operated according to its design rate of 24 cubic metres of process water per day. It continues to provide valuable data and operational experience for the design of commercial scale plants for future UCG projects.

During the year further enhancements were implemented to improve staffing efficiency at the facility. This involved integrating the UCG and GTL operational teams to operate as a single operational chain. This has given operational process controllers and shift supervisors the opportunity to expand their experience across the technologies as well as build on specific areas of expertise. The change has also minimised the interface between the two technologies. It has also allowed the teams to operate on a new shift system and focus on a single effort with clear lines of responsibility.

Linc Energy’s UCG technology proved robust as Queensland and the demonstration site was affected by flooding. To maintain site operations, staff were flown to and from the facility by helicopter. Despite the large volumes of water around the site during this time, the UCG to GTL facility continued to operate according to its design expectations.

UNITED STATES

Oil And Gas Acquisitions

During December 2010 Linc Energy underlined its intention to enter the United States oil and gas production sector through a series of aggressive asset acquisitions. During the period, the company acquired producing oil fields covering 47,204 acres in the North American states of Alaska and Wyoming.

Alaska

During the period Linc Energy signed an agreement to purchase 19,348 acres of oil and gas assets in the world’s largest undeveloped onshore oil producing region, ‘Umiat’, located in the Alaskan North Slope region. Purchased for US$56 million, the acquisition provides the company with an 84.5 per cent interest in Renaissance Umiat LLC, which holds a 100 per cent working interest in the Umiat oil field with an 80 per cent revenue interest in the project. It is estimated that these fields hold about one billion barrels of original oil in place (OOIP). In the coming year Linc Energy will focus on the delineation of additional reserves, reservoir characterisation and will establish proven reserves. This will involve pre-development environmental studies and a robust drilling fluids program.

Linc Energy’s Umiat acquisition received support from the Alaskan Governor’s Office. The Governor’s office plans to develop a road and pipeline corridor from Umiat to the Trans-Alaska Pipeline System to facilitate additional resource development in the area.

Wyoming

In Wyoming Linc Energy acquired three oil fields covering 27,856 acres near Glenrock from Rancher Energy Corporation. From this purchase the company gained oil and gas leases, property interests (including all overriding royalty interests held by the former owner) and oil production fields known as ‘Big Muddy’, ‘South Glenrock B’ and ‘South Cole Creek’. Current total production from the fields is approximately 200 barrels of oil per day from which Linc Energy gained its first oil revenue stream. It is estimated that these fields hold about 466 million barrels of OOIP. With the application of EOR techniques it is estimated that oil production could potentially exceed 10,000 barrels per day.

Oil And Gas Exploration

Alaska

In July 2010 Linc Energy took ownership of about 122,000 acres of oil and gas leases in the Cook Inlet Basin. Acquired from GeoPetro Alaska LLC, the company gained leases in blocks known as ‘Point MacKenzie’ and ‘Trading Bay’.

Towards the end of 2010 Linc Energy drilled its first Alaskan oil and gas exploration well known as LEA 1. This well was located about 2.4 kilometres, or 1.5 miles, from existing major gas pipeline infrastructure. Selected according to seismic data from GeoPetro, the well was drilled to a depth of 1,927 metres or 6,323 feet. Three significant sandstone units within the Tyonek Formation contained appreciable amounts of pure dry methane. Following intensive testing it proved uneconomic. Linc Energy anticipates that the source of the gas encountered in LEA 1 may be found in higher concentrations in other parts of the block.In the coming period Linc Energy plans to unitise acreage south of LEA 1, gather additional seismic data, and drill new targets on the Point MacKenzie block.

UCG Demonstration Project

Linc Energy has identified the United States to be a key market to launch commercial UCG operations. The company has coal interests in Alaska and the Powder River and Washakie Basins in Wyoming that it is focusing on for the development of UCG projects.

Alaska

Alaska contains the largest amount of coal resources in the United States and Linc Energy recognises that UCG can provide important future energy requirements for the South Central and Interior Alaskan regions.

During the period Linc Energy, through a competitive tender process, was awarded UCG exploration licenses for acreage held by the Alaska Mental Health Trust Authority. The licenses span 167,917 acres across the Cook Inlet Basin and Interior regions. Preliminary geological assessments for the Cook Inlet Basin revealed that the licence areas held by Linc Energy are highly prospective, containing evidence of thick coal seams at moderate depths. For the Interior region, information on coal seams down-dip from the town of Healy show high promise.

An integrated, phased exploration program is underway to acquire resource specifics in a cost-effective manner. This includes the collection and processing of seismic surveys and coring projects. Pending results of the first UCG demonstration in Wyoming, as well as exploration and site characterisation results, a streamlined schedule for commercialisation is conceivable for Alaska.

Wyoming

Linc Energy holds significant coal leases covering over 180,000 acres in the Powder River and Washakie Basins. This provides the company with exceptional regional coverage of the most prospective areas of the basin. Many of Linc Energy’s coal leases are located near its recently acquired oil fields, further supporting the synergy between UCG and EOR for increased oil production rates.

Exploration drilling continues in the basin to identify suitable sites for UCG. During the period six exploration holes were drilled totalling 3,265 metres or 10,712 feet. The company plans to drill an additional 20 exploratory holes by the end of the year. As part of the permitting requirements and site feasibility processes for a UCG project, Linc Energy conducted drilling and coring operations, hydrological studies and baseline groundwater sampling on the proposed UCG demonstration site in Wyoming. This involved over 35 characterisation and hydrological monitoring wells. Pending permit approval, the company plans to complete a 90 day UCG gasification exercise at the demonstration site. Upon permit completion and acceptance, Linc Energy will have sites under consideration for its first commercial UCG facility in the United States.

In the Greater Green River Basin, crossing the states of Colorado and Wyoming, Linc Energy leased 3,320 acres of state coal leases for site assessment for UCG. Regional geologic studies in southern Wyoming identified the existence of relatively thick coal seams at moderate depths prospective for UCG. Referred to as the ‘Little Snake River’ project, this area of interest will undergo an exploration program to obtain initial UCG characterisation data. During the period an exploration permit was filed with the State of Colorado for prospective lands in the southern part of the area for the Little Snake River project.

UZBEKISTAN

Yerostigaz UCG Facility

Linc Energy holds an almost 92 per cent controlling interest in the world’s only commercial UCG facility. The year 2011 marks 50 years of commercial UCG at the Yerostigaz facility which supplies synthesis gas for power generation to the nearby Angren Power Station. To mark this achievement Linc Energy will showcase its UCG expertise in a series of global events.

During the period Linc Energy installed two new turbo centrifugal compressors that has resulted in up to a 30 per cent reduction in electricity usage at the facility. By reducing this major cost item, the savings gained contribute to the facility’s bottom line profitability.

Linc Energy also implemented opportunities for training at the facility. Ten Yerostigaz staff members were selected based on their demonstrated dedication and leadership abilities and were given the opportunity to receive further training and development. This will ensure Yerostigaz is adequately staffed with the right mix of skills for the future. The year also welcomed new Board members and a new Chief Executive Officer. The previous Chief Executive Officer of the Yerostigaz facility has relocated to Linc Energy’s Brisbane head office to work on its global UCG projects.

In the coming year Linc Energy will conduct a broad review of other opportunities in the region for the use of UCG synthesis gas produced from the facility.

UNITED KINGDOM AND EUROPE

During the period Linc Energy signed an exclusive agreement to acquire a 10 per cent interest in PowerHouse Energy Inc to use its leading Pyromex ultra high temperature aboveground gasification process to produce high quality syngas with almost no carbon dioxide emissions. The technology achieves this without consuming high volumes of water or power.

The agreement provides Linc Energy with a perpetual, exclusive, royalty-bearing licence to use, own, fabricate and operate the Pyromex system for aboveground coal gasification for syngas production in all territories, except Italy. PowerHouse Energy has also committed to the development of a larger Pyromex system to provide Linc Energy with an enhanced ability to apply the technology to large, mineable coal deposits.

Linc Energy also acquired a 10 per cent interest in AIM-listed AFC Energy plc, a company focused on the development of low cost hydrogen fuel cells for the cleanest power generation. Linc Energy is planning to install the latest generation AFC Energy Beta fuel cell at its demonstration facility in Queensland to utilise hydrogen removed from the UCG syngas stream to improve the carbon hydrogen ratio for the GTL process. In this case the fuel cell utilises the high value hydrogen stream and produces electricity to contribute to the operation of the GTL plant, whilst only discharging clean water. Linc Energy has since increased its shareholding to 12 per cent.

During the period Linc Energy also signed an exclusive Memorandum of Understanding with Helmholtz Centre Potsdam GFZ German Research Centre for Geosciences, based in Potsdam, Germany, to research and work on combined UCG and carbon capture and storage options. The research period is for three years and demonstrates

Linc Energy’s intention to create a carbon neutral operating environment. Research to date indicates that exhausted UCG cavities are capable of absorbing significant quantities of carbon dioxide – potentially up to 400 times more carbon than traditional carbon capture and storage options.

VIETNAM

Tonkin Project Update

Linc Energy entered into a business cooperation contract with Vietnam National Coal and Mineral Industries Group (VINACOMIN) and Japan’s Marubeni Corporation to undertake a trial UCG project in the Red River Delta region in Vietnam. The project partners remain committed to the successful completion of stage one of the project, encouraged by the burgeoning demand for alternative energy sources in Vietnam.

Following the close of the reporting period, a delegation from VINACOMIN, Marubeni and Thai Binh province visited Linc Energy’s Brisbane office and the Chinchilla Demonstration Facility. Linc Energy continues to work with the partners during the approvals process and remains confident to begin operations following additional work in Vietnam by its project partners to fully delineate the potential commercial site.